UPDATE 1-S&P cuts Turkey's rating deeper into 'junk'

Reuters Staff

3 Min Read

(Adds details from report)

ISTANBUL, May 1 (Reuters) - In an unexpected move, Standard & Poor’s cut its sovereign debt rating on Turkey further into junk territory on Tuesday, citing widening concern about the outlook for inflation amid a sell-off in the Turkish lira currency.

S&P said the ratings decision, cutting Turkey to “BB-/B” from “BB/B,” was not part of its regularly scheduled reviews, reflecting what it said were growing concerns.

“The downgrade reflects our concerns over a deteriorating inflation outlook and the long-term depreciation and volatility of Turkey’s exchange rate,” S&P said in a statement.

The agency said it did not believe the central bank hiking its late-liquidity window rate last week would be sufficient to bring down inflation to the state-lender’s 5 percent target or reduce the volatility in Turkey’s real effective exchange rate.

The bank’s reluctance to aggressively tighten policy in the face of double-digit inflation has increased concern that it is under pressure from Turkish President Tayyip Erdogan. S&P alluded to that in its statement, saying the central bank has been “facing increasing political pressure.”

With the weakening of the lira against the dollar, the private sector will have a harder time repaying its foreign currency-denominated debt, S&P said, adding this would negatively impact government debt - 40 percent of which is denominated in foreign currency.

Numerous large Turkish companies have sought to restructure their debts. Reuters reported in April that Turkish food giant Yildiz Holding would restructure $6.5 billion of its $8.5 billion in debt.

Turkey’s Dogus Holding, with outstanding loans that stood at 23.5 billion Turkish lira ($5.73 billion) at the end of 2017, is also in talks with banks on debt restructuring, according to sources familiar with the matter.

“Our downgrade reflects our view that there is a risk of a hard landing for Turkey’s overheating, credit-fueled economy,” S&P said.